Chapter 11. Bond Insurance Burns Main Street

 

You have been writing some terrific stuff. I send it along to Ajit and he's now a big fan.

 
 --Warren Buffett to Janet Tavakoli, January 3, 2008

When he was in his twenties, Warren Buffett put three-quarters of his money (around $10,000) into property and casualty insurer GEICO, and reaped a healthy profit. Since then, he has been keenly interested in insurance opportunities. The credit crisis dropped an opportunity in Berkshire Hathaway's lap.

As Bear Stearns and the Carlyle fund struggled for their survival on March 12, 2008, news about bond insurance was not a highlight, but it should have been. In what would become an ugly pattern, one of the bond insurers that had been AAA at the start of 2008 was downgraded several grades (by Fitch), and it filed a lawsuit in an attempt to nullify a nearly $2 billion guaranty.[352]

Bond insurers traditionally provided credit enhancement for municipal bonds needed to fund roads, schools, water treatment plants, and many other necessary public works. Now bond insurers are an integral part of the credit bubble problem. Most of the bond insurers (or monolines[353]) have exposure to subprime home equity loans or troubled loans bundled in risky securitizations. Most bond insurers have done dicey deals dirt cheap. Most of them need more money. It is as if they offered hurricane insurance on homes and insured everyone in Florida without enough money to cover potential obligations. Instead of insuring homes, ...

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